HEDGEYE EDGE
After a strong finish to ’23, the softer YTD trends, particularly January, were not the catalysts that the Regional Gaming stocks needed. The stocks have mostly been rangebound or down in the YTD as investors await more proof that Regional Gaming is going to be an active participant in this year’s economic expansion and 2H acceleration. We’re still in the camp that the B&M casino industry will see its share of growth, and that’s despite the optically softer trends in the YTD.
With better days on the horizon, we’re more than willing to look past the weather-impacted January and so-so February. Sure, there are other names and categories of GLL that offer faster growth stories, but the potential for inflection in both top line trends and EBITDA growth, should in due time, get investors more interested in these Regional stocks. February did accelerate from January, but the exit rate seemed to be stronger than the start of the month and given our views and setup for March / April, we still believe commentary and the optics around the industry’s trajectory will be much improved in just a months’ time. From current, we still believe Q1 GGR growth could accelerate vs Q4, which would set Q2 to accelerate further from Q1.
Along with our expectation for a gradual grind higher in GGR growth trends, we recently elevated BYD to the Hedgeye Best Idea Long List. For more perspective read on and see our recent deep dive deck – HERE.
NEAR TERM FACTORS
February was never going to be the big growth catalyst for the industry (that’s coming in Q2-Q3), but there’s reason to believe that March results (adj. for Easter) and April could be stronger. MTD tracking in important states as well as the cadence of tax refunds (accelerating in March) suggests trends should continue to grind higher. Again, it’s not a quick return to MSD growth, but there will be acceleration. Some nearer term dynamics warrant some added optimism relative to the depressed sentiment out there.
REGIONAL GAMING REVENUE MODEL UPDATE
February same store regional GGR grew 0.3% versus the prior year, ~200bps below our projection for the month. A big acceleration from the prior month’s weakness and a move back towards the momentum we saw in November through December, but not quite there yet. There were pockets of YoY strength in the Midwest while Mississippi was weaker than modeled during the period. We’re not expecting investors to get overly optimistic about current trends when the industry barely grew YoY in February. However, investors should remember that these trends come against delayed tax refund issuance and a tough February comp.
With easier comps on the come, we expect GGR to accelerate from this YTD lull. Starting with March, continuing through much of the summer months, on a trending basis. March will face the headwind of Easter, but April will have an easier comp as the Easter headwind is removed, which could make the period more of a wash. We have contemplated all these shifts along with historical seasonal trends in our forward model.
Following the YTD results, we’re still projecting full year ’24 same-store regional GGR to grow ~1-2% YoY, albeit slightly less growth than our installment that we shared in our recent Domestic Gaming deck. Yes, it’s early in the year, and yes, there will be revisions as more data feeds into the model, but the path forward should, at minimum, begin to support current estimates and potentially set up modest beats in the coming quarters. To us, this continues to justify our mid-January positive bias shift toward the Regional Gaming stocks.
GAMING STOCK CONCLUSIONS
After a year of having no Regional Gaming stock on our Best Ideas list, we added BYD to our Best Ideas list a few weeks ago – predicated on our deep dive analysis of the company and the industry (see HERE). January and perhaps the perception around February is a blemish on the YTD record, but the outlook from here is much improved relative to the protracted malaise experienced over the past year. Recall, last year we pivoted away twice (see HERE and HERE) from Regional Gaming toward Las Vegas and Online as we were less enthusiastic about the revenue backdrop. Our views lately, though, are more constructive and optimistic on all segments of gaming here in the US. For Regionals, trends should be picking up and at the same time, our views of Regional Gaming EBITDAR and cash flows being undervalued never really faltered. This is a stable business with better balance sheets and cash flows than pre-Covid, and the long-term demographic bear case is no longer as viable.
ABOUT THE REGIONAL GGR MODEL
We’re running the analysis exclusive of sports betting (SB) and iCasino (iC) given that they’re not universally offered across all the states observed in the analysis. Either way, given the much lower incremental margin on retail SB revenues, the real EBITDA upside would be derived from B&M slots and tables. Additionally, if there is an extra pick up (or setback) in slots or table trends, our model would capture it and those trends would be carried forward in our estimates. The model is generally agnostic to macro trends but does feature inputs tied to calendar shifts and calendar composition vs the prior year.